Rapid changes in world energy sector are creating global implications specially for Organization of the Petroleum Exporting Countries (OPEC) and Middle East. United Arab Emirates is one of the leading oil exporter in the world, member of OPEC and situated in Middle East.
United States has seen a dramatic increase in oil and gas development since 2008 due to new technology used in drilling shale wells called fracking.
On 14th May 2014, US department of Energy stated that the crude oil output in the United States rose 78,000 barrels a day to 8.428 million barrels last week. The highest number since 1986. The US pumped an average of 7.84 million barrels of crude oil per day at the end of last year, more than 10 percent of total world production.
As shale production outpace domestic demand United States is expected to shift from a net importer to a net exporter by 2020. The country is rapidly approaching a self-sufficiency rate of 90 percent.
Crude output will average 8.46 million barrels a day in 2014 and 9.24 million in 2015, up from 7.45 million last year. Next year’s projection would be the highest annual average since 1972.
The International Energy Agency sated in November 2013, the U.S. is expected to become the world’s top oil producer by 2015 on the shale oil boom, surpassing top energy producers including Russia and Saudi Arabia.
China, the world’s second largest oil importer after US (expected to become number one soon), has world’s largest Shale gas reserves. Currently China shale gas/oil production is very little and technologically and logistically it would not be able to explore easily. But given china’s fast growing economy and huge demand for energy, it can never ignore its indigenous resources. In China’s 12th five year plan (2011- 15), Shale gas has been listed as a priority. By 2015 China intends to complete a comprehensive survey on the size and location of its Shale gas reserves. China is expected to increase shale gas production to 6.5 bcm by 2015 and 60 to 100 bcm by 2020.
If the top two energy users in the world are looking for energy independence than certainly it will have a huge trade shock for many energy exporting countries. Recently published two reports precisely emphasis on these issues.
“The Economic Impact on UK Energy Policy of Shale Gas and Oil” a report published in May 2014 by House of Lords stated that the effects of US Shale revolution are already being felt globally. US coal displaced by Shale gas, generating more electricity in UK and Germany. North America is expected soon to become self-sufficient in energy and a large exporter of shale gas in the form of liquefied natural gas (LNG). Many other countries have also been alerted to the economic potential of their own shale resources and expect to develop them. China also plans to focus considerable resources on developing tight oil production.
Patterns of global trade in energy likely to change, reducing dependence on the Middle East and Russia and promoting energy security through greater diversity of supply.
Large scale international production of Shale gas / oil could alter the balance of the international energy market as whole and undermine the dominant role of energy exporters in Middle East and Russia. Future demand of OPEC oil is expected to reduce and GCC producers face the risk of an oversupplied oil market over the next several years.
A leading UK think tank on development issues, the Overseas Development Institute (ODI), has published a report last month predicted that increased energy supply from fracking, global oil prices could fall, which in turn could increase global GDP. It will have a positive economic impact for non oil exporting developing countries.
Reducing reliance on oil is a long term challenge for oil exporting countries as increased oil supply from unconventional sources placing downward pressure on oil prices. The report has predicted 25% to 40% fall in oil prices in next 5 years.
The fracking revolution is likely to continue to have major geopolitical impacts also. US and China stand to benefit from the prospect of greater energy independence. Report states that OPEC, Middle East and Russia are expected to lose in political terms.
At present, UAE economy is doing well, IMF stated a positive economic outlook for UAE and projected a GDP growth of over 4.4% and 4.2% for years 2014 and 2015 respectively. Few months ago Dubai has won the World Expo 2020, it has created a boom in economy especially in real estate and it will also help in economic growth for coming years.
Flourishing tourism, low inflation rates, exemplary law and order situation, so it seems all well at the present. But still UAE economy as a whole, 25% to 30% of GDP, depends on oil based revenues and any changes in oil prices would directly impact on economy.
How UAE can safeguard its interest against any negative impacts of shale revolution, few suggestions are as under:-
There is a great need to control the real estate prices and any artificial boom could lead to catastrophic results. Lessons have been learnt from 2008 experience but still strict regulations are needed to prevent speculative rise and occurrence of such incidents again . News travel fast but it seem that bad news travel even faster and often lead to unwanted chain events. IMF has also warned that “A rapid rise in housing costs in the United Arab Emirates (particularly Dubai), in part due to a recovery in the real estate sector supported by the recent winning of the World Expo 2020 contract, nonetheless warrants careful monitoring for overheating”. Any mishap again in real estate sector could be disastrous for UAE economy.
Dubai has set a great example for the world that how an economy can be transformed from scratch to a world leading position. Its booming economy does not rely on oil exports and is a role-model for other 6 Emirates of UAE. The UAE government has worked hard towards reducing the economy’s dependence on oil exports. In GCC countries UAE has the most diversified economy and latest figures shows that the contribution of the non-oil sector to the UAE’s gross domestic product has increased to 71 per cent thanks to the country’s economic diversification strategy. In upcoming situation, UAE would need to work even harder for greater economic diversification.
In coming years, UAE must be careful in launching any audacious, luxurious or super expensive projects which can cost huge money. Innovation does not always mean to spend much, it can be done smartly too. Extremely careful examination and analysis needed before taking any new debts.
The fracking revolution has a significant geopolitical and development effects. There is a low chance that only fracking shall revolution would have any negative impacts on geopolitical importance of UAE in coming few years. But it could have wider implication on the Middle East, specially keeping in mind the volatile situation of the region. UAE needs to remain vigilant and there is a great need for close cooperation among GCC countries, especially on security issues. US will not leave Middle East in next few years but still UAE and other GCC countries would like to have other options also. Like diversified economy UAE and GCC countries must have diversified security capabilities too. Keeping the country safe is the only option for economic growth, and stability comes from both defense and economic strength.
Shale revolution is a reality which no one must ignore and countries like UAE must be ready to face any outcomes. Sometimes challenging situation offers new opportunities to learn and excel. Among all Middle East and GCC countries UAE look like the best prepared nation for any financial implications from Shale revolution. But still more careful analysis and research is needed to avoid any undesirable circumstances from falling oil prices or geopolitical risks.
Imran Khan is the Senior Assistant Director (Finance) in National Electric Power Regulatory Authority (NEPRA), Government of Pakistan.
